Sony Pictures Imageworks Canada Inc.

Canadian Transfer Pricing ReportTaxation Year Ended March 31, 2014

Sony Pictures Imageworks Canada Inc. Canadian Transfer Pricing ReportTaxation Year Ended March 31, 2014

Table of Contents

Section 1: Purpose and Scope of the Report................................................................................3

Section 2: Canadian Documentation Requirements....................................................................5

Section 3: Industry Analysis...........................................................................................................73.1 Overview of the Movies and Entertainment Industry.............................................................7

3.2 Industry Profile...................................................................................................................... 7

3.3 Movies and Entertainment Industry Segments......................................................................8

3.4 Industry Trends...................................................................................................................10

3.5 Competitive Challenges and Critical Success Factors........................................................13

Section 4: Company Analysis.......................................................................................................144.1 Corporate Organization.......................................................................................................14

4.2 General Corporate Overview...............................................................................................14

4.3 Sony Animated Feature Films.............................................................................................17

Section 5: Description of the Intercompany Transactions........................................................185.1 Covered Transactions.........................................................................................................18

5.2 Description of Covered Transaction and Transfer Pricing Policies......................................19

Section 6: Functional Analysis.....................................................................................................216.1 Functions............................................................................................................................. 21

6.2 Risks................................................................................................................................... 26

6.3 Tangible Assets...................................................................................................................27

6.4 Intangible Assets.................................................................................................................27

6.5 Functional Analysis and Risk Summary and Transactional Characterization......................28

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Sony Pictures Imageworks Canada Inc. Canadian Transfer Pricing ReportTaxation Year Ended March 31, 2014

List of Exhibits

Exhibit 1.1: Glossary of Sony Group Companies.........................................................................................3Exhibit 2.1: Canadian Documentation Requirements..................................................................................5Exhibit 3.1: Operations & Assets of Major US Movie and TV companies....................................................8Exhibit 3.2: US movies & entertainment market segmentation: % share by value – 2009...........................9Exhibit 3.3: Entertainment Companies’ Internet Media Interests...............................................................12Exhibit 4.1: Abridged Corporate Organization Chart..................................................................................14Exhibit 4.2: Sony Group Functional Organization Chart............................................................................15Exhibit 5.1: Covered Transaction, Methodology and Quantum – FY2014.................................................18Exhibit 5.2: Intercompany Transaction Flow Diagram................................................................................19Exhibit 6.1: Sony Imageworks Canada Production Pipeline......................................................................23Exhibit 6.2: Functional Analysis Summary.................................................................................................28

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Section 1: Purpose and Scope of the Report

In 2012, Sony Pictures Imageworks Canada Inc. (“Sony Imageworks Canada”) engaged Ernst & Young LLP (“EY”) to prepare a Canadian transfer pricing report that analyzed the cross-border intercompany transaction between Sony Imageworks Canada and Sony Pictures Imageworks Inc. (“Sony Imageworks US”) for the fiscal year ended March 31, 2011 (the “FYE2011 Report”). The FYE2011 Report has been prepared under the framework set out in subparagraphs 247(4)(a)(i) through (vi) of the Income Tax Act (Canada)1, Information Circular IC 87-2R (“IC 87-2R”)2 issued by the Canada Revenue Agency (“CRA”) and the principles outlined in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations3 issued by the Organization for Economic Co-operation and Development (the “OECD Guidelines”).

The purpose of this document (the “FYE2014 Report”) is to update the information provided in FYE2011 Report for the fiscal year ended March 31, 2014 (“FYE2014”). This FYE2014 Report has been prepared by Sony Global Tax Office (“GTO”). Specifically, GTO has reviewed the information provided in FYE2011 Report, and confirms that they are accurate and relevant for FYE2014. Unless stated otherwise below, GTO confirms that the factual information provided in Sections 1 through 9 are current and accurate, including the information contained in “Industry Analysis,” “Company Analysis,” “Description of the Intercompany Transactions,” “Functional Analysis,” “Economic Analysis”, “Financial Analysis” and “Summary”.

The glossary of abbreviations used for relevant companies in the Sony Group is included in the exhibit below:

Exhibit 1.1: Glossary of Sony Group Companies

Entity Residence Abbreviation

Sony Pictures Imageworks Canada Inc. Canada Sony Imageworks Canada

Sony Pictures Imageworks Inc. U.S. Sony Imageworks US

Source: Sony Management.

This Report covers the following related party transaction between Sony Imageworks Canada and Sony Imageworks US (the “Covered Transaction”):

► Transaction 1: Provision of contract animation services by Sony Imageworks Canada to Sony Imageworks US.

This Report is based on the Canadian transfer pricing legislation effective for Sony Imageworks Canada’s taxation year ended FYE2014. The analysis in this Report is applicable only to the Covered Transaction and the specific taxation year covered by this Report. This Report does not include any related party transactions conducted between Sony Imageworks Canada and related entities, other than the Covered Transaction. If such transactions have not been conducted based on arm’s length terms and conditions, the results of this Report may be impacted.

This Report takes into account only Canadian transfer pricing considerations and documentation requirements. No other domestic, international or foreign tax, non-tax or transfer pricing considerations have been taken into account.

1 R.S.C. 1985, Chapter 1 (5th Suppl.), as amended. 2 Information Circular 87-2R, International Transfer Pricing, September 27, 1999.3 OECD, Paris, 1995-1998.

Section 2: Canadian Documentation Requirements

The exhibit below presents a summary of the documentation requirements of subparagraphs 247(4)(a)(i) to (vi) of the Act and additional documentation requirements of the CRA, and references the Section of this Report where these items can be found.

Exhibit 2.1: Canadian Documentation Requirements

Documentation Items

Included in Report:(Yes; No;

N/A)

Reference or Comments

Subparagraphs 247(4)(a)(i) to (vi) of the Act require that a taxpayer must have records or documents that provide a complete and accurate description, in all material respects, of the following items:

1. The property or services to which the transaction relates. Yes Section 5

2. The terms and conditions of the transaction and their relationship, if any, to the terms and conditions of each other transaction entered into between the persons or partnerships involved in the transaction.

Yes Section 5

3. The identity of the persons or partnerships involved in the transaction, and their relationship at the time the transaction was entered into. Yes Sections 1, 4 and

5

4. The functions performed, the property used or contributed, and the risks assumed by the persons or partnerships involved in the transaction.4 Yes Sections 5 and 6

5. The data and methods considered and the analysis performed to determine the transfer prices or the allocations of profits or losses or contributions to costs, as the case may be, for the transaction.This includes:► A description of the comparable transactions considered and of

those used in applying the pricing method;► An assessment of the degree of comparability of such transactions

with the taxpayer’s transactions; and ► A description of any adjustments made to enhance the degree of

comparability. Where the taxpayer considers more than one method, this also includes the analysis performed using each of those methods, as well as the analysis that led to the selection of the chosen method.

Yes Section 7

6. The assumptions, strategies, and policies, if any, that influenced the determination of the transfer prices or the allocations of profits or losses or contributions to costs, as the case may be, for the transaction. This includes all the factors that materially affect the determination of the transfer prices, such as market penetration strategies or any economic assumptions that were relied on to determine the transfer prices.

Yes Sections 5 and 7

In addition, as outlined in IC 87-2R, the CRA expects the taxpayer’s documentation to include:5

7. The general organization and description of the business; Yes Sections 4 and 6

8. The selection of a particular transfer pricing methodology, including an explanation of why the selected method is more appropriate than any higher-ranking methods;

Yes Section 7

9. The projection of the expected benefits as they relate to the valuation of an intangible; N/A N/A

4 OECD Guidelines, paragraphs 1.20 through 1.27 of the OECD Guidelines describe the functional analysis process, and paragraphs 5.23 and 5.24 give an overview of the documentation required to support such an analysis.

5 IC 87-2R, paragraph 187.

Exhibit 2.1: Canadian Documentation Requirements

Documentation Items

Included in Report:(Yes; No;

N/A)

Reference or Comments

10. The scope of the search and criteria used to select comparables; Yes Section 7

11. An analysis of the factors determining comparability, including a review of the differences and attempts made to make adjustments; and Yes Section 7

12. The assumptions, strategies, and policies as they relate to the tangible property, intangible property, and services being transferred. Yes Section 7

A description of the legislative and administrative transfer pricing framework in Canada is included in Appendix A.

Section 3: Industry Analysis6

3.1 Overview of the Movies and Entertainment IndustryThe following analysis provides an overview of the movies and entertainment industry under the following headings:

► Movies and Entertainment industry profile;

► The industry segments; and

► Competitive challenge and critical success factors.

3.2 Industry ProfileLarge, diversified companies dominate the industry. Among the biggest are Walt Disney Co., News Corp. Ltd.., Time Warner Inc., CBS Corp. and Viacom Inc., as well as General Electric Co.’s majority-owned NBC Universal Inc., and Sony Corp. These companies finance the development of new products, have extensive libraries of products, and often own distribution channels for bringing content to the public.

The ownership of diverse entertainment businesses creates opportunities for cross-promotion. Companies can gain an economic edge from owning both the product (such as a TV show) and the distribution channel (such as a broadcast network). Additional opportunities to leverage trademarks, copyrights, and “creative assets” (i.e., writers, producers, actors, and the content they produce) are arising in the evolving multimedia sector. For example, a popular movie can spawn a best-selling music album or a video game, a novel can inspire a film, and so on.

However, a single company’s ownership of both content and distribution is no guarantee that its offerings will be well received by audiences. Ultimately, consumers will spend their money on the movies, programs, and music that they like and that are delivered conveniently and economically. In addition to self-produced content, several programming packagers and distributors rely on content from outside sources.

3.2.1 Movie Production

The six major Hollywood film studios are Time Warner’s Warner Bros., Walt Disney’s Buena Vista, News Corp.’s 20th Century Fox, Viacom’s Paramount, as well as Sony/Columbia, and General Electric’s Universal. These studios typically account for close to 80% of the market share in terms of box office revenues.

Movies today usually are made under a contract signed by a major distributor, a production company, and a collection of freelance talent. With a major theatrical film, a distributor typically funds a movie from start to finish or provides a portion of the financing in return for fees and a share of the proceeds. In some

6 The statements, figures, and opinions provided under Section 3 –Industry Analysis are issued from various sources namely:► Sony’s website: www.sony.net;► Standard & Poor’s: “Industry Surveys – Movies & Entertainment,” March 18, 2010;► Datamonitor’s: “Industry Profile – Movies & Entertainment in the United States,” March 2010;► Datamonitor’s: Industry Profile – Movies & Entertainment in Canada,” March 2010;► CFTPA and APFTQ’s “2009 Profile – An Economic Report on the Canadian Film and Television Production

Industry,” - 2009.

cases, a producer grants theatrical distribution rights to one party and sells home video rights to another; on occasion, the international rights may also be parceled out separately.

3.3 Movies and Entertainment Industry SegmentsSince the early 1990s, the US movie and home entertainment business has experienced remarkable growth thanks to expanding audiences, pipelines, and content. These industries provide products and services for audiences around the world, including new films shown in theatres, video and music titles, and a wide range of television (TV) shows. Through various kinds of distribution arrangements, content owners receive their revenues from various sources, such as the sale or rental of their products to consumers, advertising sales, and subscriptions services.

Exhibit 3.1: Operations & Assets of Major US Movie and TV companies

Source: Standard & Poor’s: “Industry Surveys – Movies & Entertainment,” March 18, 2010.

The movies & entertainment market is comprised of a number of different segments including rental movies, retail film, cinema attendance, and music sales. While the latter remains significant, movies form the central driver for market’ revenues. Buyers are individual consumers who buy/rent DVDs or watch movies at the cinema.

Exhibit 3.2 shows the market share for each of the three main sectors in the movies & entertainment industry.

Exhibit 3.2: US movies & entertainment market segmentation: % share by value – 2009

Source: Datamonitor’s: “Industry Profile – Movies & Entertainment in the United States,” March 2010.

3.3.1 The Film Industry

Movies remain a cornerstone of the US entertainment industry, accounting for over 80% of the total movies and entertainment market share in the US and over 83% of the market share in Canada, according to Datamonitor. The movies segment includes box office and home video sales.

Consumers spend billions of dollars annually to watch films in various formats. In 2009, over 1.4 billion movie tickets were sold in North American theatres—an average of about 4.0 million tickets per day—for a box office total of $10.6 billion. Meanwhile, consumers also spent approximately $20.0 billion on home video purchases and rentals (across all formats).

An overwhelming portion of any given film’s revenues are derived from box office receipts and home video sales (both domestic and international). However, other channels, such as TV licensing and pay-per-view, as well as emerging platforms such as video-on-demand (VoD) and Internet downloads, also contribute a meaningful (although significantly smaller) portion of a film’s total earnings over its life span.

Over the past several years, the movie releases of six film distribution companies (or studios) have typically accounted for almost 80% of box office revenues in North America. These companies are 20th Century Fox (part of News Corp. Ltd.), Universal Pictures (General Electric Co.), Sony Pictures (Sony Corp.), WarnerBros. (Time Warner Inc.), Paramount Pictures (Viacom Inc.), and Walt Disney Pictures (Walt Disney Co.).

In addition, there are a number of independent studios, the most prominent of which are Lionsgate Entertainment Corp., as well as DreamWorks Animation SKG Inc., which have distribution agreements with Viacom’s Paramount Pictures and Disney’s Touchstone Pictures, respectively. Among other studios started in the past decade are The Weinstein Co., Summit Entertainment LLC, Liberty Media Corp.’s Overture Films, and CBS Corp.’s CBS Films.

Movie theatres keep about 50% of the dollars that consumers spend at the domestic box office, with the remainder going to the distributors as film rental fees. The three largest film exhibitors – Regal Entertainment Group, AMC Entertainment Inc., and Cinemark USA Inc. – account for nearly 39% of nearly 39,000 US theatrical indoor movie screens. Including Carmike Cinemas Inc. and Cineplex Entertainment LP, the top-five theatre chains represent nearly 48% of the screen count.

3.3.2 The Television Industry

The Big Four English-language broadcast networks in the US are Disney’s ABC network, CBS, News Corp.’s FOX, and General Electric’s NBC. After a merger of CBS’s UPN and Time Warner’s WB networks, the CW Network debuted in fall 2006, during which News Corp. launched another English-language broadcast network known as MyNetwork TV. Meanwhile, there are two major Spanish-language broadcast networks in the US, namely Univision Communications Inc.’s Univision network and General Electric’s Telemundo network.

In addition, there are hundreds of cable and satellite TV networks. These include ad-supported basic cable channels (e.g., ESPN, TNT, TBS, USA, MTV, Nickelodeon, Lifetime, Syfy, FX, Cartoon, Discovery, Fox News, CNN), as well as premium TV channels (e.g., HBO/Cinemax, Showtime, and Starz/Encore) that derive their revenues from subscriptions. A new premium channel, Epix, was launched in October 2009.

The four major broadcast networks (ABC, CBS, NBC, and FOX) remain a primary force in US television programming. These networks are the largest providers of high profile, first-run shows as well as “event programming” extravaganzas like the National Football League’s (NFL’s) Super Bowl and the movie industry’s Academy Awards that provide advertisers with the broadest audience reach possible.

In spite of the increased segmentation of TV audiences and competition from other media, TV viewing levels continue to rise, as media consumption continues at a record pace. The average American consumed 140 hours of TV, 27 hours of Internet, and three hours of mobile video each month, according to Nielsen’s Three Screen Report for the third quarter of 2009.

3.3.3 The Music Industry

Total US album sales across all formats, both physical and digital (minus track-equivalent albums), fell approximately 13% in 2009, to nearly 374 million units, according to Nielsen SoundScan, a market research firm. S&P believes that approximately two-thirds of the industry’s revenue base is currently derived from the sales of CDs and other physical formats, with the remainder represented by digital revenues (downloads, mobile, etc.)

Four distributors dominate the worldwide recorded music industry, namely, France-based Vivendi SA’s Universal Music Group, Japan-based Sony Corp.’s Sony Music Entertainment; UK-based EMI Group PLC; and US–based Warner Music Group. These four companies typically account for more than 80% market share of US music sales.

The live music segment of the industry mainly generates its revenues from ticket sales related to concert promotion. Concert promoters also derive a growing portion of revenues from ancillary sources such as online fan clubs, sponsorships, merchandising, endorsements, and entrepreneurial ventures. The live entertainment market is highly consolidated, with the newly created Live Nation Entertainment Inc. by far the dominant player (as discussed in the “Current Environment” section of this Survey), while Anschutz Entertainment Group’s AEG Live is the second largest.

3.4 Industry TrendsOver the past few years, the landscape of the movie and home entertainment industry has continued to evolve rapidly, as technological developments continue to affect the traditional means of content distribution, creating further shifts in the industry’s economics. These trends have been borne out of the growing shifts in media consumption toward time shifting and the personalization of content.

3.4.1 Online Platforms

Facing declining sales on the saturation of physical formats such as CDs and DVDs, the music labels and film/TV studios are actively seeking to monetize their content by expanding into digital distribution. For example, they are leveraging the growing popularity of various direct-to-consumer online distribution channels and are addressing the needs of consumers who wish to access their content while on the move. In the TV business, cable networks, after a substantial increase in investments in original programming in recent years, have gained a greater share of viewers from the broadcast networks. The Internet and other emerging platforms also help to explain a material increase in audience fragmentation across the TV landscape.

In recent years, the Movies & Entertainment industry has been realigning itself to new media distribution outlets. As more consumers use the Internet and mobile devices amid a fast-changing media world, entertainment companies are moving aggressively to capitalize on this trend by making their content available through a growing number of digital outlets.

Virtually all of the major content providers have cultivated their own sites, including Hulu.com (a joint venture of News Corp., NBC Universal, and Disney), ABC.com, TV.com (CBS Corp.), and MTV Overdrive (Viacom Inc.).

In addition, the studios and networks also offer their content to broadband video sites such as AOL Video (Time Warner Inc.), MSN Video (Microsoft Corp.), Yahoo Video (Yahoo! Inc.), and Amazon.com Inc., as well as other online video syndication outlets including Brightcove Inc., Netvibes, and Veoh Networks Inc. Furthermore, several cable TV networks have recently launched or are testing Web-TV authentication platforms.

Exhibit 3.3: Entertainment Companies’ Internet Media Interests

Source: Standard & Poor’s: “Industry Surveys – Movies & Entertainment,” March 18, 2010.

3.4.2 3D Movies

The 3D release of Avatar by Century Fox became the all-time worldwide box office champion and the highest grossing domestic film for 2009 and marked a significant year for 3D movies. Last year, six 3D releases garnered over $100 million at the domestic box office.

By the end of 2009, nearly 3,400 of the screens in North America—less than 10% of the total screen count—had been upgraded with the necessary 3D equipment. Over the next year, however, we expect the continued buildout of 3D screens in domestic theatres (as well as internationally) on a relatively steady pace.

These efforts are being led by Digital Cinema Implementation Partners (DCIP)—formed in October 2008 as a joint venture of the three largest exhibitors, Regal Entertainment, AMC Entertainment, and Cinemark Holdings—which is working to secure the necessary financing to speed up the conversion of screens to digital. Digital conversion costs about $70,000 per screen, with 3D capability adding another $10,000 to $15,000. As of early 2009, DCIP was targeting its 3D deployment in nearly 20,000 movie screens across North America over a period of three-and-a-half years.

3.5 Competitive Challenges and Critical Success FactorsIn the movies & entertainment market there are a number of large market players. However, the market remains fairly fragmented given that there are numerous movie production companies, including independent companies. The wide range and diversity of audience tastes allows films scope for significant differentiation in terms of genre and content. While the leading market players in the industry typically produce high budget films with high fixed costs, such outlay is not always necessary to produce a successful movie.

Some of the major film production companies also specialize in other markets. A number of the large players are media conglomerates, operating in a diverse range of markets spanning movies, music, internet, and television. The diversification of media conglomerates diffuses dependency and limits the short term economic pressure in any particular market segment.

Section 4: Company Analysis7

4.1 Corporate OrganizationAn abridged corporate organization chart is included in the exhibit below.

Exhibit 4.1: Abridged Corporate Organization Chart

Source: Compiled using information provided by Sony Management.

A more detailed corporate organization chart is provided in Appendix C.

4.2 General Corporate OverviewSony Corporation (“Sony” or the “Sony Group”), incorporated on May 7, 1946, is engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer, professional and industrial markets, as well as game consoles and software. Sony’s primary manufacturing facilities are located in Japan, Europe, and Asia. Sony also utilizes third-party contract manufacturers for certain products. Sony’s products are marketed throughout the world by sales subsidiaries and unaffiliated distributors, as well as direct sales through the Internet.

Sony is engaged in the development, production, manufacture, marketing, distribution and broadcasting of image-based software, including motion picture, home entertainment and television products. Sony

7 Unless otherwise noted, the source information for this section is Sony Corporation Annual Report for the Year Ended March 31, 2010, Sony management and from http://www.sony.net.

provides end-to-end solutions through products that include the market-leading Blu-ray Disc™ players, BRAVIA® televisions, Cyber-shot® digital cameras, Handycam® Camcorders, VAIO® computers, broadcast cameras, IPELA security cameras and video conferencing and many more products that deliver the true entertainment experience.

Sony is also engaged in the development, production, manufacture, and distribution of recorded music. Further, Sony is also engaged in various financial service businesses, including life and non-life insurance operations through its Japanese insurance subsidiaries, banking operations through a Japanese Internet-based banking subsidiary and leasing and credit financing operations through a subsidiary in Japan. In addition, Sony is engaged in a network service business and an advertising agency business in Japan.

In December 2009, Sharp Display Products Corporation, a joint venture between Sony and Sharp Corporation for the production and sale of large-sized liquid crystal display (LCD) panels and modules was established. In January 2010, the Company's Sony Electronics acquired Convergent Media Systems, a provider of video integration solutions to the enterprise market. In February 2010, the Company established a wholly owned subsidiary, Sony Network Entertainment Inc., in the United States to function as the Company's integrated planner and operator of Internet-based content delivery services to owners of Sony televisions, game machines and other hardware.

The following exhibit provides a summary of the Sony Group’s functional organisation chart.

Exhibit 4.2: Sony Group Functional Organization Chart

Source: http://www.sony.net.

Sony recorded consolidated annual sales of approximately US$78 billion for the fiscal year ended March 31, 2010, and it employs 167,900 people worldwide.

4.2.1 Overview of the Sony Group in Canada

Established in 1955, Sony of Canada Ltd. is a wholly-owned subsidiary of the Sony Corporation. With headquarters in Toronto, sales offices in Vancouver and Montreal and distribution centres in Coquitlam, British Columbia, and Whitby, Ontario, approximately 900 employees support a network of more than 500 authorized dealers and over 60 Sony Style retail locations across Canada.

In addition to the above, the Sony Group also operates sister organizations such as Sony Pictures, Sony Music, Sony Ericsson, Sony Imageworks Canada (discussed below) and Sony Computer Entertainment to ensure that Sony is offering Canadians the full power of high definition content gaming and entertainment.

4.2.2 Sony Imageworks US

Sony Pictures Imageworks Inc. was incorporated in 1993 and is an American CGI animation film studio based in Culver City, California (“CA”). Sony Imageworks US is a division of Sony Pictures Digital Productions, which oversees the digital production and online entertainment assets of Sony Pictures Entertainment.

The studio is an Academy Award® winning, state-of-the-art visual effects and animation unit of Sony Pictures Digital Productions and is dedicated to live-action visual effects and character animation, all- computer graphics (“CG”) animation, and Imageworks stereoscopic 3D imagery.

Sony’s films go through three key phases:

1. Development and Pre-production;2. Production; and 3. Post-production.

Sony Imageworks US has been recognized by the Academy of Motion Picture Arts and Sciences with Oscars for their work on Spider-Man 2 and the computer-animated short film The ChubbChubbs!. Sony Imageworks US is currently in production on The Green Lantern (3D), the hybrid live-action/animation film The Smurfs (3D) and the animated feature Arthur Christmas (3D). Other recent credits inlcude Alice in Wonderland (3D), Zookeeper, Cloudy with a Chance of Meatballs (3D), G-Force (3D) and Watchmen.

4.2.3 Sony Imageworks Canada

Sony Imageworks Canada was established in 2010, and is located in the Yaletown area of Vancouver, British Columbia (“BC”), Canada. Sony Imageworks Canada is a wholly-owned subsidiary of Sony Imageworks US.

Vancouver, BC was selected as an international location for the Sony Group, mainly due to the mature and high quality talent pool of artists that exists in Vancouver, its geographical location (i.e. same time zone) and close proximity to Sony Imageworks US in Culver City, CA, and provincial government tax incentives, which have made Vancouver a cost effective place to do business for digital animation studios.

As of March 31, 2014, Sony Imageworks Canada employed approximately 48 staff.

Sony Imageworks Canada provides contract animation services to Sony Imageworks US during the production phase of animated films.

For a detailed discussion of the services provided by Sony Imageworks Canada to Sony Imageworks US please refer to section 6, functional analysis.

4.3 Sony Animated Feature FilmsSony Imageworks US’s first independent animated film was the 5-minute short The ChubbChubbs!, which was released on July 3, 2002. The ChubbChubbs! director, Eric Armstrong, won an Oscar8 for Best Animated Short in 2002

Sony Imageworks US completed its first full length feature animation project in 2006 with the release of Open Season. The film opened at number 1 in the U.S. with $23 million on its opening weekend. Open Season eventually grossed $85.1 million in the U.S. and $104.8 million in foreign countries making $189.9 million worldwide.

On June 8, 2007, Sony released its second full length animated feature film Surf’s Up , which grossed $17.6 million in its opening weekend and eventually went on to gross $149 million worldwide. The film was nominated for 10 Annie Awards9, including Best Animated Feature, and went on to win two awards for Animated Effects and Animation Production Artist.

In 2009, Sony released Cloudy with a Chance of Meatballs which grossed $30.3 million in its first weekend of release in the U.S. The film earned approximately $243 million worldwide. Cloudy with a Chance of Meatballs received four Annie Award nominations. It was nominated for Best Animated Feature, Animated Effects, Directing in a Feature Production, and Writing in a Feature Production. It also received a Golden Globe nomination for Best Animated Feature.

4.3.1 Technology

Since its incorporation, from its Culver City headquarters Sony Imageworks US has achieved breakthroughs in the application of CG for filmmaking. Consequently, the company has attracted some of the world's finest talent in this area, making Culver City one of the hubs for Sony Imageworks US software development activities. Sony’s technical and creative teams have collaborated to develop extensive production software used in-house to create its movies and further the technology in CG movie making, including Imageworks patented Imagemotion™ performance capture system. This proprietary technology10, allows the production of animated images of a quality, richness and vibrancy that are unique in the industry, and above all, allows the director to control the end results. Sony continues to invest heavily in its software systems and believes that further advancements will lead to additional productivity and quality improvements in the making of its computer animated films.

8 The Academy Award, also known as the Oscar, is an accolade bestowed by the American Academy of Motion Picture Arts and Sciences (AMPAS) to recognize excellence of professionals in the film industry, including directors, actors, and writers.

9 The Annie Awards have been presented by the Los Angeles, California branch of the International Animated Film Association, ASIFA-Hollywood since 1972. Originally designed to celebrate lifetime or career contributions to animation in the fields of producing, directing, animation, design, writing, voice acting, sound and sound effects, etc., in 1992 it began to honour animation as a whole, and created the category of Best Animated Feature.

10 It should be noted that all intellectual property (“IP”) relating to the proprietary technology is not maintained or owned by Sony Imageworks Canada.

Section 5: Description of the Intercompany Transactions

5.1 Covered TransactionsThe exhibit below outlines the Covered Transaction, the parties to the intercompany transaction, the transfer pricing methodology (“TPM”) applied and the quantum of the Covered Transaction during FYE2014.

Exhibit 5.1: Covered Transaction, Methodology and Quantum – FYE2014

#Parties to the Transaction

Transaction Type TPMQuantum (C$)

Seller Purchaser FYE2014

1Sony

Imageworks Canada

Sony Imageworks

US

Provision of contract animation services Cost plus 26,233,234

Total 26,233,234

Source: Information provided by Sony Management.

An intercompany transaction flow diagram is included in the exhibit below identifying the parties to the Covered Transaction under review.

Exhibit 5.2: Intercompany Transaction Flow Diagram

5.2 Description of Covered Transaction and Transfer Pricing PoliciesThe following subsection provides a description of the transfer pricing methodologies employed for the Covered Transaction.

The Covered Transaction is analyzed in further detail in the following sections of this Report.

5.2.1 Transaction 1: Provision of Contract Animation Services to Sony Imageworks US

During the period under review, Sony Imageworks Canada provided Sony Imageworks US with contract animation services with respect to the production of animated films. The services provided related to the animation of 3D models and film sets and are performed by Sony Imageworks Canada under strict direction from Sony Imageworks US.

During FYE2014, Sony Imageworks Canada applied the cost plus method (“C+M”) for determining its intercompany pricing and these services were charged at a fully loaded costs plus a profit mark-up of 6%. This transaction is further analyzed in Section 7 of this Report.

Section 6: Functional Analysis

The functional analysis describes the functions, risks and assets associated with the intercompany transactions under review. A functional analysis is essential to the development or analysis of transfer pricing policies for the following reasons:

► The functions undertaken by each related party typically correlate with the risks borne and intangible assets assumed and developed;

► The functions performed, risks assumed and assets used associated with a related party’s operations usually have a significant effect on its relative contribution to the transaction;

► The search for comparable transactions or parties relies on the findings of the functional analysis to identify transactions involving unrelated companies with functions, risks and assets sufficiently similar to those of a related party; and

► The arm’s length transfer pricing is determined by a review of financial data from those unrelated transactions or comparable companies with functions, risks and assets sufficiently similar to those of a related party.

The functional analysis involves finding and organizing facts about a business in terms of its functions, risks and assets in order to identify how these are divided between the companies involved in the transactions under review. The functional analysis is a first step in the analysis of whether the relative profits (or losses) earned by the entities are appropriate to the functions performed, degree of risks undertaken and the value of the assets provided in the intercompany transactions.

Another purpose of the functional analysis is to identify internal comparable transactions and/or to serve as a basis for selecting external comparable transactions in order to help determine whether the controlled transactions differ from those that would have been made between persons dealing at arm’s length.

The following is a summary of the main functions performed, risks incurred and assets used by Sony Imageworks Canada and Sony Imageworks US with respect to the Covered Transaction (i.e. Transaction 1) in FYE2014.

6.1 FunctionsThe production of Sony animated films has three main phases including: development and pre-production, production and post-production. Each phase involves a number of stages during which the animated films are developed. The functions performed by Sony Imageworks Canada and Sony Imageworks US under each stage, are described in the sections below.

Phase I: Development and Pre-production

The development and pre-production functions are performed solely by Sony Imageworks US. Sony Imageworks Canada is not involved in the pre-production functions. The activities performed during the pre-production phase include:

► Pre-production Design

► Modelling; and

► Rigging.

Phase II: Production

Once a reel is approved for production, Sony Imageworks US will begin to undertake the production phase which includes:

► Creating the layout of each scene (“shot”);

► Animating the characters;

► Creating the visual effects of each scene;

► Lighting; and

► Compositing.

During this phase Sony Imageworks US will engage Sony Imageworks Canada to assist with the animation stage of a particular project. In the future however, Sony Imageworks Canada may contemplate additional production tasks further to those listed above.

In this regard Sony Imageworks Canada will undertake approximately 60% of the animation work under the strict direction from Sony Imageworks US. Any creative input from Sony Imageworks Canada’s artists must first be approved by the Sony Imageworks US director and ensures that the animation work properly reflects the director’s design and vision. The animation stage is the only stage during the whole process in which Sony Imageworks Canada is directly involved.

The remaining animation function and production stages are the sole responsibility of Sony Imageworks US.

Phase III: Post-production functions

Post production functions are performed by Sony Imageworks US. Once the scenes are rendered or set into a single frame of film, Sony Imageworks US is then responsible for finalizing the product by adding the sounds and music and transferring the film to video for distribution.

Other Functions

There are other functions related to the production and distribution of animated films. These functions are administrative in nature and therefore indirectly related to the production of the animated films; they include:

► The distribution of films; and► Administrative functions.

The sections below provide a description of each phase of the production pipeline and the relative involvement of Sony Imageworks US and Sony Imageworks Canada.

Exhibit 6.1 below shows the 3 phases and various stages in the production pipeline of a typical animated film. The stages in blue are the responsibility of Sony Imageworks US while the stages in red are the responsibility of Sony Imageworks Canada.

Exhibit 6.1: Sony Imageworks Canada Production Pipeline

Source: Information provided by Sony Imageworks Canada Management.

The following is a summary of the main functions performed, during each of the 3 phases listed above, by Sony Imageworks Canada and Sony Imageworks US.

6.1.1 Pre-production Design

Pre-production design/Storyboarding is the process of turning the ideas and concepts into still pictures that show the flow of the story from the beginning to the end. The storyboarding process is meant to give an overall look and feel for the story prior to actually animating characters and sets, and it allows writers, designers and producers to iterate quickly on the original story. Design encompasses the conceptual and practical art direction of the film and usually consists of drawings and paintings.

Design functions are performed by Sony Imageworks US. Sony Imageworks US may be called upon to assist in the visual design of the film. This includes but is not limited to twenty or thirty previsualizations and limited storyboarding to demonstrate the visual effects for one or more scenes.

6.1.2 Modeling

Modeling from the initial designs a studio’s modellers will create 3D models that will later be used for planning and animation.

The development of the characters and sets is based on the storyboards and 2D designs created by Sony Imageworks US clients during the pre-production stage. Characters are modeled such that they can be passed off to the Animation Departments at Sony Imageworks US and Sony Imageworks Canada to be animated, and the sets are modeled to be the backdrops for where the story will take place, much like the sets in a traditional live action production.

After the sets are built in 3-D, they must be dressed with prop models, such as chairs, curtains and toys, to create a believable world. Set dressers work closely with the director at Sony Imageworks US to ensure that the director’s vision for the environment is being realized.

With respect to the transaction under review, no modeling functions are currently performed by Sony Imageworks Canada.

6.1.3 Rigging

Modelers work with armatures, which is a wire frame around a character model, to break down the character models into workable geometry.

The rigging of the 3D models is performed by Sony Imageworks US. The rigging phase of a project allows the Animation Departments at Sony Imageworks US and Sony Imageworks Canada to manipulate the modelled 3D figure in any way they want.

With respect to the transaction under review, no rigging functions are currently performed by Sony Imageworks Canada.

6.1.4 Layout

Layout is the process of preparing how each shot will be shown as part of the final product. The Layout department prepares the cameras, and places the sets and characters within each shot, as well as provides the movement of the characters.

Similar to the above development and pre-production stages, the layout stage functions are also performed by Sony Imageworks US who translate the story into 3D scenes. The layout crew choreographs the characters in the set and uses a virtual camera to create shots that capture the emotion and story point of each scene. Layout often produces multiple versions of shots to provide the editorial department with choices for cutting the scene for maximum storytelling effect. Once the scene has been cut, the final version is released to animation.

With respect to the transaction under review, no layout functions are currently performed by Sony Imageworks Canada.

6.1.5 Animation

During the animation stage, animators take the developed characters and bringing them to life in each shot that the layout department has produced.

The animation functions are performed by both Sony Imageworks US and Sony Imageworks Canada. Using Sony Imageworks US’ animation software, Sony Imageworks US’ and Sony Imageworks Canada’s animators choreograph the movements and facial expressions in each scene by using computer controls and the character’s avatars to define key poses. The computer then creates the “in-between” frames, which the animator adjusts as necessary.

During FYE2014 Sony Imageworks Canada employed 43 animators and performed approximately 60% of the animation functions on behalf of Sony Imageworks US.

6.1.6 Special Effects

The Special Effects (“FX”) Department animates everything in the film with the exception of characters. Examples of this would be the creation of exhaust fumes that would come from the tailpipe of a car, or fire from an explosion.

The FX functions are performed by Sony Imageworks US using its FX software to create the special visual effect of all the props in each animated film scene.

With respect to the transaction under review, no FX functions are currently performed by Sony Imageworks Canada.

6.1.7 Lighting

The Lighting Department is responsible for establishing the position, colour, intensity and scope of virtual lights in each shot.

The lighting functions are performed by Sony Imageworks US whose shading and lighting specialists define the room ambiance of each scene to enhance its mood and emotion. Lighting takes its inspiration from the moody color scripts provided by Sony Imageworks US on behalf of its clients.

With respect to the transaction under review, no lighting functions are currently performed by Sony Imageworks Canada.

6.1.8 Compositing

The Compositing Department bring together all of the 3D elements produced by the previous departments in the pipeline, to create the final rendered image ready for film.

Sony Imageworks US is responsible for translating all of the information in the files that make up the shot-sets, colours, character movement, etc. into a single frame of film. Sony Imageworks US has a unique computer system that interprets the data and incorporates motion blur. Sony Imageworks US has developed its own proprietary software for rendering shots and is used to maintain the high quality of Sony products.

With respect to the transaction under review, no rendering functions are performed by Sony Imageworks Canada.

6.1.9 Post-Production

Post-production is the process of recording and editing the soundtrack, sound mixing (sound design, sound effects, foley and music), and the transfer of film to video or data.

Sony Imageworks US clients are responsible for determining and approving all the music and lyrics used in a production. With respect to the transaction under review, Sony Imageworks Canada does not perform post-production functions.

6.1.10 Distribution of Films

Under the existing production service agreement between Sony Imageworks US and Sony Imageworks Canada, Columbia Pictures Industries Inc., a wholly owned subsidiary of the Sony Group, is responsible for the global distribution and commercial exploitation of the animated films produced by Sony Imageworks US and Sony Imageworks Canada.

Therefore, with respect to the transaction under review, neither Sony Imageworks US or Sony Imageworks Canada perform any distribution functions.

6.2 Risks6.2.1 Market Risk

Market risk occurs when a company is subjected to adverse sales conditions due to either increased competition in the marketplace, adverse demand conditions within the market, or the inability to develop markets or position products to service targeted customers.

Sony Imageworks US bears the burden of covering the costs of production as Sony Imageworks US earns revenues from fees paid by internal clients for animation and VFX services rendered on Sony Pictures animation and Columbia Pictures Inc. films as well as VFX services rendered for external clients on third party live-action VFX films. Therefore, Sony Imageworks US is responsible for bearing the losses resulting from an inability to secure future prospects from internal or external clients. As such the majority of the market risk rests with Sony Imageworks US.

Sony Imageworks Canada bears certain limited market risk, but to a much lesser degree due to the above described cost plus transfer pricing method. If the production is not successful, Sony Imageworks Canada faces the risk of having reduced work from Sony Imageworks US and its operations as a going concern would be threatened. However, notwithstanding the above, on a film by film basis it is noted that Sony Imageworks Canada bears no market risk.

6.2.2 Product Risk

Product/service liability refers to a supplier’s exposure to losses resulting from a failure of its products to perform as represented to customers. Such exposure includes but is not limited to liability for business interruption and for personal injury.

The production costs associated with each animated film or live-action VFX film are high. Sony Imageworks US has substantial ongoing costs and consequently bears material risks for ensuring an appropriate number of prospects are available to meet business objectives.

Management maintains that animated and VFX film production is relatively stable.

With respect to the transaction under review, Sony Imageworks Canada bears no product risk on a project by project basis as Sony Imageworks Canada’s immediate revenues have no correlation with the aftermarket success of an animated or VFX film. However, Sony Imageworks Canada indirectly shares a portion of the product risk as continued commercially unsuccessful films would likely result in a reduction of work from Sony Imageworks US and its operations as a going concern would be threatened.

6.2.3 Copyright Infringement Risk

Copyright Infringement risk occurs when works covered by copyright law are used in a way that violates one of the copyright owner’s exclusive rights.

Sony Imageworks US, as the sole owner of the copyrights, patents, trademarks, distribution and all other ownership rights related to the Productions, bears most of the copyright infringement risks. Copyright infringement risk is high, as piracy activities have become more prevalent worldwide, including illegal storage or theft if a film’s digital disc is stolen during the post-production phase, theft of movie reels during delivery, illegal reproductions of DVDs while films are only shown in theatrical exhibition, among other methods.

With respect to the transaction under review, Sony Imageworks Canada does not bear copyright infringement risk, since it will be compensated by Sony Imageworks US for its production services and not based on the profitability of the Productions.

6.2.4 Foreign Exchange Risk

Foreign exchange risk occurs when purchases of materials, resources, or services are denominated in one currency while sales of finished products are denominated in another currency.

Sony Imageworks US will bear most of the foreign exchange risk since payments made to Sony Imageworks Canada for production expenses or refundable deposits will be denominated in CAD and converted by Sony Imageworks US to USD on the date of payment at the prevailing exchange rate available on that date. Thus, Sony Imageworks Canada will not be exposed to material foreign exchange risk.

6.3 Tangible AssetsSony Imageworks Canada recognized certain routine tangible (capital) assets in the non-consolidated financial statements at March 31, 2014 with a book value of approximately US$335,744.

6.4 Intangible AssetsWith respect to each film completed by Sony Imageworks US and Sony Imageworks Canada, the third party distributor has the sole and exclusive ownership rights, title and interest of each production and all related elements and materials, including the copyrights, patents and trademarks relating to each production. Furthermore, the third party distributor has the right to use, exploit, advertise, exhibit and otherwise turn to account each production and all versions.

However, in relation to the production of the film itself Sony Imageworks US retains exclusive rights, title, and interest of all inventions, processes, techniques, methods, device software, data or know-how utilised or developed to carry out any portion of the production or to achieve any special effects, together with the physical and computer graphic models designed and/or constructed by Sony Imageworks US and Sony Imageworks Canada.

Sony Imageworks US acknowledges that Sony Imageworks Canada may require access to certain proprietary assets of Sony Imageworks US in order to render the services with respect to each animated and live-action VFX film, including digital models and other assets related to a project. Sony Imageworks US provides such intangible assets to Sony Imageworks Canada at no cost subject to licensing and confidentiality terms and conditions implemented by Sony Imageworks US.

With respect to the transaction under review Sony Imageworks Canada does not own any intangible assets.

6.5 Functional Analysis and Risk Summary and Transactional Characterization

Exhibit 6.2 summarizes the functional and risk analysis and assets used and contributed by Sony Imageworks Canada and Sony Imageworks US.

Exhibit 6.2: Functional Analysis Summary

Transaction Flow Sony Imageworks US Sony Imageworks Canada

Functions Performed Pre-Production

► Pre-production Design

► Modelling

► Rigging

Production

► Layout

► Animation

► FX (Special Effects)

► Lighting

► Compositing

Post-Production

► Sound effects, music and lyrics implementation

Production

► Animation Services

Risks Assumed ► Market Risk

► Foreign Exchange Risk

► Product Liability Risk

► Copyright Infringement Risk

► Market Risk (indirect & limited)

► Product Liability Risk (indirect & limited)

Assets ► Routine Tangible Assets and Intangible Assets

► Routine Tangible Assets

With respect to the provision of contract animation services, it is appropriate to characterize Sony Imageworks Canada as a limited risk service provider of contract animation services, whereas, Sony Imageworks US can be characterized as a service recipient